Smaller firms in better shape

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Higher raw material costs and rising wage bills are stoking inflation, according to SG Warburg's latest survey of business confidence. It showed a sharp rise in the number of companies reporting higher input and selling prices.

Despite cost pressures, however, companies are managing to increase margins, and earnings prospects for medium-sized companies remain much brighter than for the biggest businesses.

According to Warburg, the smallest quoted companies (with market values up to about £320m) should have seen earnings grow by 19 per cent last year and can expect 25 per cent growth this year. That compares with forecast growth of 12 per cent in both years for the FT-SE 100 constituents.

Confidence, however, is on the wane after last year's optimism, with a balance of 33 per cent of companies feeling better about prospects than three months ago compared with 57 per cent when the survey was last conducted in September.

The brightest prospects remain for those companies with a high exposure to overseas markets. Half of the 376 companies responding to Warburg's survey were more optimistic about exports than they were three months ago.

Inflationary pressure appears to be arising from two main sources - sharply higher raw material prices and rising capacity utilisation. Nearly two- thirds of firms are experiencing higher input costs compared with less than half six months ago.

Capacity is constraining the ability of companies to meet rising demand, but with more than half expected to increase capital investment over the next year, that pressure is expected to ease during 1995.

Darren Winder, Warburg's UK economist, said the findings were broadly in line with expectations of a further period of robust growth, although he thought there was little indication that the rate of growth was about to accelerate.

Earnings forecasts for some smaller companies are expected to stay under pressure after a round of downgrades during the final quarter of 1994.